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Philadelphia Hopes to Lure Firms
To Its Newly Converted Shores

By

J. Alex Tarquinio Staff Reporter of The Wall Street Journal

Updated Nov. 26, 1997 12:01 a.m. ET

As the USS John F. Kennedy pulled away from the Philadelphia Naval Shipyard in September 1995, the triumphant theme from the film "Rocky" was struck up on board. It was the grand finale to nearly two centuries of Naval shipbuilding and repair in Philadelphia. Second- and third-generation shipyard workers stood on the docks, crying and shaking hands. The next day most of them were out of work.

Although hundreds of military installations across the country are being converted to private use, the Philadelphia site is one of only four with a shipyard. Over the past two years, as a handful of small local businesses occupied the base's newly converted industrial park, Philadelphia planners scrambled to find a tenant for the site's greatest asset: its massive dry docks. Now those planners have reached an agreement with the Norwegian shipbuilding firm Kvaerner ASA.

"There are very few big successful shipbuilders in the world," says William Hankowsky, president of the Philadelphia Industrial Development Corp. "There were points when I wasn't sure if we were going to get anybody."

Philadelphia has landed one of the industry's largest and most technically advanced shipbuilders, with operations spread across 12 countries in Europe and Asia. This will be Kvaerner's first shipyard in the U.S., enabling the firm to compete for contracts limited by federal law to American-built ships, including container ships that sail between domestic ports.

"We will be giving -- as well as gaining -- knowledge in the United States," says Diderik Schnitler, Kvaerner's president of shipbuilding.

The city will grant Kvaerner a 99-year lease to 114 acres, including the shipyard's two largest dry docks. At the end of the lease, Kvaerner will have the option to buy the property for one dollar. The company plans to spend $135 million over the next 15 years to build 10 new assembly shops and offices, as well as updating other work-related facilities.

In Kvaerner's factories, workers operate robotic welders while standing on huge rotating floors. They don't actually touch the metal panels that make up a ship until these are ready for assembly in the dry dock, a cement structure below water level where ships are assembled and repaired.

Public funds will cover most of the up-front costs of conversion, including $182 million in state capital development funds and $30 million from the city. The state and city will also provide Kvaerner with $30 million in low-interest loans. An additional $187 million of public funds will finance worker training for Kvaerner, primarily through existing programs. Mr. Hankowsky says the public expenditure is justified because this deal will revitalize a local industry. "You cannot look at this as just a real-estate transaction," he says. "This is analogous to building a new convention center or an airport. Philadelphia cannot compete in the shipbuilding trade until we have a shipyard."

With Kvaerner on board, Mr. Hankowsky believes maritime businesses will be attracted to the large industrial park on the Navy shipyard, recently christened the Philadelphia Naval Business Center.

The site lies at the base of Broad Street, Philadelphia's main boulevard running north to south. At 1,100 acres, it is larger than Center City, Philadelphia's central business district. The Navy is in the process of deeding all but 133 acres to the city, including 7.7 million square feet of office and industrial space. So far 14 small businesses, most with fewer than 50 employees, have occupied the sprawling suburban-style campus of 19th century brick buildings and modern warehouses. About two-thirds of the new tenants relocated from elsewhere within the city.

Howard Mintz says he moved his printing business from downtown Philadelphia to the Naval Business Center because he needed more space. He says that his employees also appreciate the security of working in a restricted area, something the city plans to maintain. Although the shipyard may drain some tenants from existing industrial sites, John Derham of Cushman & Wakefield believes the Kvaerner deal will benefit Philadelphia's downtown real-estate market, which he says has been depressed for most of the 1990s. The last downtown office building was completed in 1991.

High-rise vacancy rates have dropped to about 3% or 4%, but that's mostly due to competitive pricing. Overall vacancy rates in Center City remain above 20%. However, Mr. Derham points out that some maritime businesses relocating to Philadelphia in the wake of the Kvaerner deal may choose to establish offices downtown. If so, they will be following Kvaerner's lead. Although the company plans to break ground on the first of 10 new buildings at the shipyard in mid-1998, it will establish its U.S. corporate headquarters in Center City.